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The country’s low public debt load and competent governance are positives, while the country remains somewhat vulnerable to global financial market shifts and high property prices, DBRS said in a report issued on 8 March.

According to the credit bureau:

“The rating reflects Luxembourg’s sound public finances and fiscal flexibility, its solid institutions and stable political environment, its advanced and very wealthy economy, and its strong external position. These credit strengths offset the challenges associated with the country’s relatively limited degree of economic diversification, its vulnerability to external shocks, and rising household debt and potential medium-term pressures in the residential real estate market.”

Despite international changes to corporate tax rules and ongoing EU state aid investigations, “Luxembourg is still expected to remain an attractive destination for investment.”

The firm gave the grand duchy a positive economic forecast. Adriana Alvarado, vice president and lead analyst on Luxembourg at DBRS, said in a statement emailed to press on 11 March that:

“Despite its exposure to financial market volatility, the country’s economic prospects remain robust. Economic growth is estimated at 3.0% in 2018 and projected at this same rate in 2019, outpacing that of the Euro area. On upside risks to the economic outlook, Luxembourg could continue to benefit from the relocation of financial firms from the United Kingdom to the Grand Duchy as a result of Brexit. Conversely, downside risks to the outlook could emerge from severe volatility in stock markets that could result from a global reassessment of financial risks or sharp changes in monetary policy.”

The outlook for Luxembourg sovereign debt was “stable”, meaning no changes are expected in the foreseeable future. Alvarado wrote:

“Given Luxembourg’s strong fundamentals, DBRS sees downward pressure on the ratings as unlikely. Nevertheless, downward pressure could stem from a severe shock to Luxembourg’s large international financial centre, most likely generated by sustained turmoil in financial markets, or material damage to Luxembourg’s attractiveness for investment. Either of these scenarios could have a significant impact on the economy and public finances.”

Pierre Gramegna, the DP finance minister, said in a statement issued on Friday that the ratings confirmation validated the coalition government’s budget policies.

Generally speaking, a higher rating lowers the cost of borrowing in the capital markets.

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